COMPENSATION COMMITTEE REPORT 2004

1st Source officers are reviewed annually by their immediate supervisor. Due to the performance of the Company in 2002, the salary review for members of the Bank's Policy Committee was delayed by at least six months. Reviews for the three most senior officers were delayed by at least one year. The review includes an assessment of management performance and achievement of individual, group and Company goals.

The performance review is a normal part of 1st Source's Salary Administration Program. Positions are rated and placed in a salary range. Annually, with the Board's approval, management establishes a salary performance grid that sets the range of merit increases that may be given to officers depending on their individual performance and their position (lower, middle or upper third) in their respective salary range.

The categories of performance under the Company's review program are:

o Substantially and consistently exceeds job requirements
o Often exceeds job requirements
o Meets and sometimes exceeds job requirements
o Meets some job requirements, improvement is required
o Does not meet minimal job requirements

Management awards salary increases as determined under the guidelines of the Salary Administration Program in conformance with the salary performance grid in effect for the year and the annual budget.

All of the officers reported herein, including Mr. Murphy, are under the 1st Source Salary Administration Program. In his case, he is evaluated by us against

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a series of objectives set in the Company's annual budget plan and in its long-term strategic plan as annually approved by our full Board. In January 2003, we reviewed Mr. Murphy's salary. Under his employment contract described elsewhere in this proxy statement, Mr. Murphy has a right to receive a minimum annual increase of 5%. Mr. Murphy waived his right to a 5% increase for this review due to the Company's 2002 credit performance and recommended to us that he be given no increase. We accepted his recommendation and no increase was granted. In January 2004, Mr. Murphy again waived his rights under the contract to a 5% increase and asked that his review be delayed until the second quarter of 2004. We accepted his recommendation. Consequently, no increase was given, and he may be reviewed in the second quarter of 2004.

Bonuses under 1st Source's Executive Incentive Plan (EIP) are determined annually following the close of the year. The bonus is calculated based on the officer's "partnership level" adjusted for the Company's performance relative to plan and for the individual's performance relative to weighted objectives set at the beginning of the year. In Mr. Murphy's case, the base bonus is calculated at a "partnership level" of 25% of his salary. For each 1% that the Company varies from its profit plan for the year, the base bonus is adjusted up or down by 2.5%. Since the Company performed well below its plan for the year, Mr. Murphy asked that no award be made him under the Company's Executive Incentive Plan. We accepted his recommendation and no award was made in 2004 for 2003 performance.

Also, under the EIP, 50% of the Executive Incentive Plan bonus is paid in cash at the time of the award. The other 50% is paid in book value stock and is subject to forfeiture over the succeeding five (5) years. The forfeiture lapses ratably for each year the employee remains with the Company and for each year, or period of years, the Company grows its net income by a targeted minimum per year. During this period, the "at risk" portion of the bonus, delineated in book value stock, is transferred to the participant as the forfeiture period lapses. In Mr. Murphy's case, while determined in book value stock, the award is paid in cash as the forfeiture lapses. Due to the Company's performance in 2002, the remaining 20% of the award made in 1997 would be forfeited. Last year Mr. Murphy asked that the forfeiture period for these awards be extended for four (4) years for all members of the Executive Incentive Plan except himself, Mr. Jones, and Mr. Qualey, as they are the most senior officers of the Corporation with credit and management authority and should bear full responsibility for the Company's performance. The recommendation for the extension was made in an effort to encourage the management team throughout the Company to accelerate their efforts to return 1st Source to its former earnings levels. We approved this extension, as did the Board of Directors, and the Shareholders. We also extended the forfeiture period for the awards made in 1998, 1999, 2000 and 2001 by four (4) years for all members of the Executive Incentive Plan except Mr. Murphy, who forfeited the remaining 60% of the 1998 award in January 2004.

Mr. Murphy was also eligible for a cash bonus under the 1998 Performance Compensation Plan previously approved by the Shareholders and based on goals established by us at the beginning of 2002. For 2002, the award level set was 2.5% of net income, or the same percentage as set for the 3 previous years. However, due to the continuing credit problems experienced by the Company, Mr. Murphy recommended that no award be made and waived his right to receive any.
The Committee concurred and no award was made in 2002. For 2003, Mr. Murphy was to receive 2.5% under the 1998 Plan. Due to the Company's inability to continue to provide the Split-Dollar Insurance program originally agreed to in 1998, Mr. Murphy and 1st Source agreed to terminate the split-dollar arrangement on terms that also satisfied the Company's obligation to him under the 1998 Performance Compensation Plan. Under the terms of that plan, Mr. Murphy earned a bonus of $478,850. Mr. Murphy waived payment of the cash bonus but agreed to accept the transfer of the Company's right to recoup its premium payments previously made under the split-dollar plan as an in-kind payment under the 1998 Performance Compensation Plan. This allowed the Company to meet its obligation under the Plan, provide a benefit to Mr. Murphy that it had been obligated to since 1998, and release the Company from having to make any further payments for the split-dollar insurance. All this had become necessary due to changes in tax treatment and other regulations affecting split-dollar insurance arrangements. The distribution of the Company's interest of $963,487 in future cash benefits is taxable to Mr. Murphy. Since taxes were not envisioned when 1st Source awarded the split-dollar insurance benefit to Mr. Murphy in 1998, as it was a tax advantaged plan, we agreed to reimburse Mr. Murphy for payment of such tax. Any amounts up to his tax liability of $656,000 that he may earn in 2004 (or subsequent years, if needed) under the 1998 Performance Compensation Plan, which was set at 2.5% of net income for 2004, will serve to satisfy the Company's commitment to reimburse this additional tax liability.

EXECUTIVE COMPENSATION COMMITTEE
Timothy K. Ozark, Chairman
William P. Johnson Rex Martin Richard J. Pfeil

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-- Proxy Statement March 2004